IR35 is a nightmare for contractors, since it came into force on the 6th April 2000, it has never been clear cut as to whether a contractor is in or out of IR35. Being in IR35 means paying a lot more tax.
There are a range of factors to consider, including:
1. The nature of the contract and written terms
2. Right of substitution
3. Mutality of obligation
4. Right of control
5. Provision of own equipment
6. Financial risk
7. Opportunity to profit
8. Length of engagement
9. ‘part and parcel’ of the organization
10. Entitlement to employee-type benefits
11. Right of termination
12. Personal factors
13. The intention of the parties
HMRC estimate that there are 200,000 personal service companies.
Since July HMRC have been pursuing BBC Presenters and so far it looks like 100 presenters are on their list, this will of course be the tip of iceberg and many more will be caught if HMRC win.
Why can’t we just have a simple online test for IR35 as we do with employment status! it would save so much confusion
Consultants who work as contractors often build up funds their limited companies, they do this as a safe guard because being a contractor, there can be gaps between contracts and they will need cash to carry themselves through to the next contract.
But what if they decide to retire or they get offered their dream job as an employee, they may have lots of assets and cash in their company, perhaps more that £25,000.
They might even find that their main client insists they become employees for example
Some of the BBC’s biggest freelance stars could be asked to join the payroll or leave the corporation, as a new test aims to clear up tax issues.
It is part of a clampdown on the use of personal service companies (PSCs) and a move to tax more freelancers at source.
BBC News 7th November 2013
How could they close the company and use Entrepreneurs Tax Relief to pay 10% tax?
They could use a Members Voluntary Liquidation (MVL).
- The Insolvency Practitioner will ask the Contractor’s Accountant to confirm that the clients tax affairs are inorder and that appropriate advice has been given
- Final Accounts will need to be prepared and creditors paid
- A Declaration of Insolvency will be signed – The declaration of insolvency demonstrates that the company will be able to settle or secure liabilities and the costs of liquidation within 12 months
- A meeting of Shareholders will appoint the Insolvency Practitioner
- Notices will be posted at Companies House and in the London Gazzette
- Then the MVL can be a carried out and funds distributed
- Arrangements can be put in place to allow the directors access to funds during the process
Using an MVL should mean you can claim Entrepreneurs Tax Relief and pay 10% tax.
Before doing an MVL you should consider whether alternative options such as paying dividends might be more appropriate or whether the cost of the MVL exceeds the potential tax saved or whether Strike Off and ESC C16 could be used.
This Monday (18th July), the BBC’s CFO, Zarin Patel and its head of employment tax, David Smith, were quizzed about the use of personal service companies (PSC’s) within the corporation by the Commons Public Accounts Committee. It emerged that out of the Beeb’s 467 presenters, 148 broadcasters, i.e. nearly a third, were being paid via PSC’s. These 148 are not unique, however, as the BBC engages 25,000 freelancers.
This has been under discussion for a while and back in 2010 Accountingweb reported
Amongst those appearing as freelancers are: Jeremy Paxman (earning about £1m a year); Fiona Bruce (with annual earnings of around £500,000); and Fearne Cotton (who rakes in around £200,000 per annum)*.
However, not all presenters have fled the broadcaster’s payroll, with the likes of Huw Edwards (Ten O’Clock News presenter); Nick Robinson (political editor) and Evan Davis (presenter of the Today programme) still prepared to suffer good old fashioned PAYE.
It is hard to see on the face of it why a TV presenter would not be an employee based on:
- Personal Service/Subsititution
- Mutuality of Obligation
- Financial Risk
A BBC spokesman stated that the corporation provides HMRC with a detailed annual report of all payments made to PSC’s.
In response HMRC has now announced that it will increase its investigations into PSC’s. After admitting that HMRC had only enquired into 23 PSC’s, the department’s chief, Lin Homer, vowed to increase such investigations ‘ten-fold’ over the next year.